Hollywood Pushes Back Against New China Tax

By

Ben Fritz and

Laurie Burkitt

Updated April 28, 2013 12:23 p.m. ET

Twentieth Century Fox is refusing to accept about $23 million it is owed on Chinese box-office receipts for producing "Life of Pi" as a result of a clash between Hollywood and Chinese authorities, studio executives say.

ENLARGE

Hollywood studios are working to resolve a dispute with China. Pictured, moviegoers walk past a 'Skyfall' poster after the firm's premier in Beijing.
Associated Press

The dispute centers on a new value-added tax that China is in the process of imposing on a wide range of goods and services. When it comes to movie tickets, state-owned distributor China Film Group has recently sought to deduct the cost of the tax entirely from foreign producers' share of the box office, said several people involved in international film distribution.

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The tax method is causing consternation in Hollywood, where it is seen as the latest in a series of efforts to limit American studios' ability to generate profits in China despite a deal last year that was supposed to open doors. The policy undercuts one of the provisions of that agreement, reached between the American and Chinese governments, which bumped up the percentage of ticket sales that foreign producers receive.

Executives from several studios including Fox are objecting to China Film's approach to dealing with the tax. In other countries, value-added taxes are taken out of gross box-office receipts, before the money is divided between studios and theaters. Studio executives believe China Film's new policy could reduce by 8% their theatrical revenue in coming years from the world's fastest-growing movie market, potentially costing them millions of dollars.

"This is a serious concern and we don't know when it will be resolved," said one senior movie studio executive involved in the discussions.

The new tax has created confusion for many businesses operating in China, legal experts say. When a pilot program was rolled out in select cities last year, officials didn't specify whether it would apply to movie tickets. This month the government stated publicly that it would apply to cinemas, beginning in August.

But at a meeting of U.S. film studios organized by the Motion Picture Association of America last week, a senior executive from Fox told other international distribution professionals in attendance that China Film was attempting to reduce its payment on "Life of Pi"—released last year in China—due to the new value-added tax. Rather than accept what it believes is an underpayment, the studio is refusing to take any money until the issue is resolved.

One movie industry expert in China said that due to the lack of clear rules, the amount of a tax any studio has to pay may depend on its ability to negotiate with China Film Group. The expert also noted that domestic studios are exempt from the tax unless they are working with foreign partners.

A spokesman for China Film Group declined to discuss to discuss tax-related agreements, but said he wasn't aware of any disputes with Hollywood studios. "China Film Group always has good relationships with foreign studios, so as far as I'm concerned, there is no controversy," said spokesman Jiang Defu.

A spokeswoman for Fox, which like The Wall Street Journal is owned by News Corp., declined to comment.

The MPAA has been involved in the dispute since last week's meeting, which was held at the Cinema-Con movie theater industry convention in Las Vegas. Studios and the MPAA are working to resolve the issue without involving the U.S. government.

"I'm well aware of the issue," said Chris Dodd, the former U.S. senator who is CEO of the trade association. "We're working on it and the studios are."

"Pi" was one of the most successful films last year in China, grossing $91 million. As last year's agreement allowed foreign producers to receive a 25% share of box office, Fox's share of the "Pi" box office should translate to nearly $23 million. China Film's imposition of the new tax would reduce Fox's take by approximately $2 million, according to people briefed on the situation.

Executives at two other studios who attended the Las Vegas meeting said they agreed with Fox's position. They said they were concerned that if Fox accepted the lower payment, that could become a precedent that would impact the entire industry.

American films that opened in China after "Life of Pi" and are awaiting their cut of box office grosses in the country include "Skyfall," released by Sony Pictures Entertainment, "The Hobbit: An Unexpected Journey" from Time Warner Inc.'s Warner Bros., Walt Disney Co.'s "Oz: The Great and Powerful," and "G.I. Joe: Redemption," distributed by Viacom Inc.'s Paramount Pictures.

Nearly all the foreign films that play in China come from Hollywood. Spokesmen for Sony, Warner Bros., Paramount and Disney declined to comment.

Last year's agreement was seen as marking major progress in Hollywood studios' long-running effort to gain greater access to the world's second largest movie market-projected to be No. 1 by 2020. Aside from the increase in box-office share allowed for foreign producers, the agreement increased the number of foreign films allowed to play in China and share in box office revenue from 20 to 34.

But a series of setbacks have followed. Last summer, China Film opened several similar movies, including "The Dark Knight Rises" and "The Amazing Spider-Man," on the same dates. It also imposed month long "blackout periods" during which no foreign pictures were allowed to play in Chinese theaters.

Those moves were widely perceived as an effort to limit the total box office of imported films, which were far outpacing local productions. This year, the trend has been the opposite.

Executives at Sony Pictures were shocked earlier this month when Chinese authorities pulled "Django Unchained" from theaters the day it started playing. The studio made minor changes to satisfy censors and on Friday said it would be rereleased in China on May 12.

The Hollywood executives concerned about the new tax dispute said they are hopeful it will be resolved soon, but none expect to enjoy smooth sailing going forward.

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